Glenboden M & A Originations

Grove Mill a pearl of a New Zealand wine brand for a global portfolio

Priority Rating priority rating 3
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Origination Status Management announcement of FY 2009 forecast, June 2009
Asset New Zealand Wine Co. Ltd. (New Zealand), leading domestic wine producer
Buyer candidates include Pernod Ricard, Diageo
Seller shareholders of NZW
Buyer Rationale acquire flagship New Zealand wine brand for global commercialisation
Seller Rationale debt burden, forex exposure, vinyard liabilities, acceptable valuation
NBs Australia's Jacob's Creak provides compelling precedent for Grove Hill
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Glenboden has generally been negative about the value of wine brand portfolios, in view of the write-downs incurred by both Constellation Brands and Foster's in that business. However, where a wine producer is focused on a tighly -managed business model, as in the case of NZW, then sustainable brand value can be achieved. We believe that Grove Mill has a great story and strong fundamentals but, given the challenges of managing vinyards and exports, it could reach its full potential only within a global wine and spirits group.

NZW is an integrated niche wine business...Founded in 1988, NZW is a vertically -integrated wine business, from cultivation to bottling and marketing. Its three -brand approach has Grove Mill as its flagship, as an international premium brand, with Sanctuary and Frog Haven following up as mainstream brands.

... with an impressive Marlborough estate positioning ...NZW's story is based on the distinctive style of the Marlborough estate, where 70% of its grapes come from either owned or leased vinyards. The company operates a state of the art winery, built in 1994, that has doubled its capacity to over 3.000 tonnes p.a.

There's also an ecological angle, with the company measuring its contribution by the return of frog and birdlife to an adjacent wetland sanctuary.

NZW appears to present a modern, well -focused and value -added proposition, which is reflected in the sales and financial performance (see chart).

... and strong sales growth and profitabilityIn line with sound medium -term growth, sales grew by 10% in H1 2009, over the prior year, and volume sales for FY 2009 are on target.

The EBITDA margin also appears high, when one strips out vinyard contributions, financial items and other distortions. However, the margin has been hit in 2009 by an over-supply of Marlborough wine stocks, after a record 2008 harvest. This is NZW's key weakness, and opportunity for a major buyer.

Wine inventory is burdensome however ...The company is shouldering over NZ$ 10 mln in inventory, balanced by a high debt burden, as a result of these wine surpluses. On top of that, management is unable to predict when supply will fall back into balance with demand, given an uncertain 2009 harvest, and so is unable to forecast FY 2009 results.

... as is forex exposureIn addition, and given that 80% of the company's sales are in export markets, NZW is heavily exposed to foreign exchange movements. Indeed, nearly NZ$ 1 mln of its net financial assets are tied up in financial derivatives to hedge against adverse movements.

These forex problems can only deteriorate, if the company proceeds with its strategy of expanding exports beyond the English -speaking world and into continental Europe, the Americas and Asia.

So NZW could better reach its potential inside a global group ...NZW has a strong and attractive brand, but may be too small to shoulder the inventory and forex burdens that are inherent in the premium wine business.

An ideal fit might be for the company, at this key point in its history, to be acquired and absorbed into the portfolio of a global wine and spirits group, as the flagship Marlborough estate brand.

A clear precedent is that of Jacob's Creek, Australia's best selling export wine. Acquired by Pernod Ricard in 2004, that brand sold 8 mln cases in 2007-8, across 65 countries.

Diageo is also a contender for such a play, as its wine portfolio is in need of refreshment.

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THIS LEAD'S VALUATION
Size (€ mln) 12
Sector wine
Asset Quality New Zealand premium
Seller small plc
Buyer large plc
P/S 2,2
P/Ebitda 12,0
Type value estimate
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